A Free-Market Energy Blog

Turning Tragedy into Triumph (BP Gulf oil spill)

By Richard W. Fulmer -- May 3, 2010

April saw two devastating disasters in the energy industry: a methane explosion at the Upper Big Branch mine in Montcoal, West Virginia that claimed 29 lives, and another explosion at the Deepwater Horizon drilling rig in the Gulf of Mexico, which took 11 more. The latter incident, because of the tens of thousands of gallons of oil now pouring from the ocean floor each day, will impact the Gulf region for years if not for decades to come.

These tragedies are a terrible reminder of the trial-and-error nature of life. Humans have accomplished many wonders over the millennia – wonders that ended the vicious cycle of crushing poverty that has been mankind’s lot throughout most of history.

But these accomplishments have often come at a very high price. Because it is in our nature to strive to better our condition and that of our children, life will never be without risk. As terrible as the consequences of failure can be, it brings with it the seeds of hope. Hope that we can learn from our mistakes and, if not succeed next time, at least not fail in the same way. From such tragic lessons come knowledge and strength.

I hope, therefore, that thorough, unbiased investigations will reveal the mistakes that were made, and provide the answers that will allow industry avoid those mistakes in the future. I fear, however, that politics may corrupt the investigation, leading us to learn the wrong lessons and increase, rather than reduce, future risk.

Politicians have two needs that make unbiased investigation difficult if not impossible:

The need for a compelling story to tell voters – complete with heroes and villains, and

The need to be seen “doing something.”

There may well be villains in both tragedies. Massey Energy, owner of the coal mine, and British Petroleum, the drilling rig operator, each reportedly have a history of safety issues. If the companies failed to act on the lessons learned from past experience, they should face whatever penalties the law prescribes, and face them with our blessing.

Many of the technical specifications for mining and oil field equipment are on the books because people died. To ignore or alter those specs without cause is to make vain those deaths and to risk more. If there are new lessons to be learned, however, it is vital that we discover them, and not through the distorting lens of politics.

We each have internal models of how the world works, and we tend to filter data through those models. While politicians are no different in this respect, they wield far greater power over other peoples’ lives. Their mistakes, therefore, can cause far greater damage than can those of executives of even the largest corporations. If the facts derived from the investigations of these two tragedies are tortured into producing villains and heroes fitting the world view of a few, powerful senators and congressmen, we will lose potentially life-saving information. The current administration’s animus to the energy industry in general, and to the coal industry in particular, gives ample cause for concern.

The need for politicians to “do something,” often results in the creation of regulations that serve only to create new problems. Suppose, for example, that the final result of a congressional inquiry into a tragedy is a bill mandating the use of technology “X.” Let us further suppose that X is, indeed, an excellent, state-of-the-art solution, and not something that was selected because Technology X Industries, Inc. made a generous campaign contribution to Senator Jones, or because the X Solutions company happens to be located in Congressman Smith’s district.

In a dynamic, free market economy, technology X is likely to be superseded very quickly by superior technology “Y.” Once X has been mandated, however, Y may never be used. First, innovators have little incentive to investigate alternatives to X, given that entrenched laws must be overturned before such alternatives can be used. Second, even if Y were to be developed, the status quo surrounding X would fight to keep the laws mandating X firmly in place.

In the short term, the impact of the West Virginia and the Gulf disasters will be terrible. Lessons learned and applied, however, can turn these tragedies into long run triumphs. It is important, therefore, that government officials reserve judgment until the investigations are complete, and that they view the results of those investigations as dispassionately as possible. The lives that have been lost, and those that could be saved, demand no less.

10 Comments

Julian Simon emphasized that our problems can make us better if we learn the right lessons. Richard’s post is in this tradition.

There will be much more to say as the causality of human error and technological failure becomes more established. But it can be said that it is wrong to think that this tragedy is “nature telling us we don’t belong,” as one environmentalist emailed recently.

A fine posting, particularly the points about politics and politicians. I spent decades covering congressional hearings following disasters — TMI, Chernobyl, Exxon Valdez, for example — and was sickened by the lack of knowledge, posturing, finger pointing and blame-laying by members of Congress and staff (usually the staff knew a hell of a lot more than the elected members).

This cycle is no different, including the clueless Goldman hearings, where the goal of the senators clearly was to find someone to blame, quick, lest voter discover that the congress was up to its a– in blame.

I don’t think I understand the references to free markets vs. politics in this post. Do we have a free market in energy? Aren’t politics and markets deeply intertwined in the energy industry as in other industries? I have read that BP’s liability is limited to 75 million dollars plus cleanup costs. I don’t know much about the oil industry, but it sure seems like that limit is a big, big, deal and an invitation to ignore the need for sufficient safeguards and backups to avoid a catastrophic failure. How does that Congressionally mandated setup in any way exemplify a “free market”?

Also, I think we really need to do better than to talk about trial and error. Off-shore oil rigs need to be “high reliability organizations” in the sense of Charles Perrow and James Reason. (Here is a good place to start:http://www.bmj.com/cgi/reprint/320/7237/768.pdf) They will not be high reliability organizations, however, if the owners do not face a meaningful civil liability for the costs of spills. It is a wonder that we have had so few rig spills given this artificial limit on liability.

Mr. Koppl,
We do not have a free market when it comes to energy or, indeed, much else in the United States. The point of my comment was that, under a free market, technological improvements could be made without the need to overcome regulatory hurdles thrown up by people with financial and political interests in maintaining the status quo.

Clearly, we want offshore platforms to be extremely reliable given the potential consequences of a system failure, and government regulations that prevent companies from using the best technology available are counterproductive.

Furthermore, I agree that the penalties for failure ought to be very high – up to and including bankruptcy. We do not want companies that repeatedly misuse and destroy resources kept in business, and the free market is very good at culling out such companies. Government rules that shield individuals and businesses from the consequences of their mistakes do us all a disservice in the long run.

I stand by my “trial-and-error” claim, though. Perfection is not humanly achievable, as much as we may wish otherwise.

The $75 million upper limit is part of the law but will not shield BP from paying a variety of cleanup costs and claims that are expected to exceed $1 billion.

One could also say that since the Gulf deep waters are public and not private property, manmade oil leaks (versus natural seepage) are artificially protected from restitution. But oil travels, as we are seeing, to places where there is private property and where private industry are at work.

My apologies if I wasn’t reading carefully or something, but it sounded to me sort of like “Hey, accidents happen!” Well, I’m glad to know were instead saying something quite sensible with which, moreover, I fully agree.

My comment about Perrow and Reason was not a demand for perfection. Hardly! Perrow coined the wonderful phrase “normal accidents” in part to underline the fact that accidents and system failure are not monsters beyond rational analysis. We must face up to the fact that accidents are normal if we are act effectively to minimize them. Similarly, James Reasons’ wonderful “swiss cheese” model underlines the impossibility of a zero error rate. I mention them to point to a *science* of accidents and errors that we should not neglect if we wish to minimize accident and error rates. If we ignore that scientific literature on the organizational and cognitive source of error and accident, then we are throwing away knowledge that can improve reliability.

I’m not tracking. (It must be me.) Are you basically saying the $75 million cap is inessential? I hear what you are saying about the likely billion or so in clean up. But then I wonder why the liability limit was ever put in. Liability insurance premia should give you information about the risks you are running. Wouldn’t the 75 million cap cut BP off from that information. Dispersed knowledge and all that, you know. My apologies in advance if I’m just being slow on the uptake.

While I agree that the $75 million cap on liability was a bad idea, I disagree with the Senate bill that proposes to retroactively raise the cap to $10 billion (see link below). If the Senate wants to raise the cap, fine. But it should not be retroactive. Section 9, clause 3 of the Constitution states: “No Bill of Attainder or ex post facto Law shall be passed.”

Process matters. The rules we live by must be stated clearly and upfront, and not after-the-fact. Ends are inextricably tied up with means; good ends cannot come from dishonest means.

Virtually all coverage and comment (including Mr. Fulmer’s, otherwise thoughtful essay) on the Deepwater Horizon mess accept that the mess constitutes a disaster. Not necessarily so, not yet.

What we have is a projected disaster that has not yet materialised.

This year in Tennessee floods killed more that a dozen people and destroyed property of thousands of individuals, and we didn’t call that a disaster.

As for environmental disaster, we don’t have one yet, and we may not. As time goes by the likelihood of an environmental disaster declines. Looking back at Exxon Valdez, it would be hard to classify that event as any kind of long term disaster. The environment/ecology has mostly recovered and thousands of people lost some money (mostly Exxon stockholders). In the case of Deepwater Horizon, it is quite possible/likely that environmental effects, in the long term and big picture, will be minimal and short lived. A month after the accident, environmentalist and media people are still hard pressed to find significant damage. It seems that much of the oil is unaccounted for or disappearing.

As for economic disaster, there is a probability that Gulf Coast economies will not experience disasterous effects, after all. BP and its contractors are likely to end up paying for most losses through (threat of) litigation, not because of fines. If smart, they will be glad to do so. Even if total losses amount to as much as $5 Billion, this would be less than one quarter’s profit for BP, hardly disasterous.

So, until this episode arrises to the level of the San Francisco earthquake, the great Chicago fire, 9/11, etc. lets not call it a disaster, please.

[…] regulations they believe will solve the problem, but often times these can have adverse effects, as explained by Richard Fulmer:Suppose, for example, that the final result of a congressional inquiry into a tragedy is a bill […]